Take-outs for directors and executives from CBL decision

Accessory liability

Section 533 of the FMCA governs involvement in contraventions leading to civil liability, also known as “accessory liability”. In this case, the FMA relied on section 533(1)(c), under which a person is involved in a contravention if they have been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention.

Unlike issuer liability for primary contraventions, accessory liability requires an element of knowledge on behalf of the accessory. Neither counsel was aware of any previous cases that had specifically addressed the meaning of section 533(1)(c), nor the application of accessory liability to the fair dealing or continuous disclosure provisions of the FMCA.

The Court therefore took an “orthodox” approach to accessory liability, approaching it in the same manner as accessory liability is dealt with under criminal law. The Court found that accessory liability requires:

1. actual knowledge (including wilful blindness) of the essential facts giving rise to the contravention, and
2. intentional participation in the contravention.

Actual knowledge

With respect to continuous disclosure, the Court determined it had to be satisfied that, at the time of the relevant contravention, Mr Mulholland knew:

1. of the relevant information
2. that the information was not generally available to the market
3. that the information was information which a reasonable person would have expected, if it were generally available to the market, to affect CBL’s share price (i.e. that the information was material information)
4. that the information related to CBL’s share price
5. that the information was not exempted from disclosure by the safe harbour exceptions in the Listing Rules, and
6. that CBL did not immediately release the information to the NZX.

The Court noted that in the context of fair dealing, an accessory must have actual knowledge that a representation is misleading (or unsubstantiated). An accessory cannot be held liable merely because they should have known of a material fact.

Two inquiries of the Court are, in our view, of particular note:

•  when assessing knowledge of materiality (item 3 above), counsel for the FMA submitted that it needed to prove only that Mr Mulholland knew the facts on which the Court would conclude that the relevant information was material information. However, the Court found that the “essential fact” that must be known by the accessory is that the information itself was material information, which essentially is a question of judgement. This requires actual knowledge of materiality, rather than mere knowledge of the facts, and
• in relation to the safe harbour exceptions (item 5 above), counsel for the FMA submitted that it did not need to prove that Mr Mulholland knew none of the safe harbours applied as these are defences that must be established by the issuer. However, the Court disagreed, finding they are not affirmative defences but are instead exceptions to the disclosure obligations themselves. Accordingly, the FMA must prove that an accessory has actual knowledge of the essential facts relevant to the safe harbour exception and that the exceptions do not apply. 

Intentional participation

In assessing the second limb of the test, Justice Gault found that the words “concerned in”, contained in section 533(1)(c), required a practical connection between an act or omission and the contravention. 

In the context of continuous disclosure, the Court found that Mr Mulholland had a practical connection with a contravention given that - despite his roles as CFO, member of the Disclosure Committee and principal Regulatory Public Disclosure Officer (amongst others) - he did not prompt the Board of CBL to consider its continuous disclosure obligations.
 
Conversely, with respect to fair dealing, the Court found that using the phrase “one-off” to refer to costs that were, in fact, likely to recur, was misleading. In its factual analysis, the Court found that Mr Mulholland had suggested that the wording “one-off” be removed from the market announcement but this suggestion had not been taken up. In the absence of an explanation as to why the wording had been retained, Mr Mulholland’s actions were enough to satisfy the Court that he had not intentionally participated in the fair dealing contravention.

Defences?

Justice Gault noted that it is possible for accessories to rely on the statutory defence in section 503 where they can prove that any involvement in a relevant contravention was due to reasonable reliance on information supplied by another person, or where all reasonable steps were taken to ensure that the primary party (typically being the issuer) complied with its obligations. 
 
In the context of continuous disclosure, the Court found that the defence under section 503 was not available to Mr Mulholland as, given the extent of his knowledge and his position in CBL, he had not taken all reasonable steps to ensure CBL complied with its obligations. 

Implications for directors/senior executives

This decision raises a number of important considerations for directors and senior executives.

• There are serious risks of personal liability in situations where directors or senior executives knowingly contribute to a contravention of the FMCA. While actual knowledge of the essential facts is required (rather than constructive knowledge), directors and senior executives should take care to ensure that relevant decision makers are taking on board all the crucial information and making assessments accordingly.
• The consequences for listed issuers (and directors and senior executives) can be severe, if the wrong decisions are made around continuous disclosure. If an issuer is in doubt about whether information is material or if an exception to disclosure applies, it should disclose the information so as not to inadvertently fall foul of its continuous disclosure obligations.
• While the Board is ultimately responsible for the continuous disclosure decisions of a listed issuer, failure to assist the Board by highlighting potentially material information and actively considering whether an exclusion to disclosure applies can have serious personal consequences for senior executives.
• Issuers should have strong internal governance processes to allow for timely and robust decision making around continuous disclosure and – just as important - should ensure that these are followed. The judgment notes that CBL had published a continuous disclosure policy which provided for the appointment of a disclosure committee by the board of directors but, despite these measures, the Court found no evidence of the disclosure policy being followed in practice. 

Chapman Tripp comment

The discussion by the Court of the “knowledge” requirement will also be relevant to directors considering their climate related disclosure obligations under Part 7A of the FMCA which provides (section 461ZG) that a director of a climate reporting entity may be found personally liable for knowingly filing climate statements that are not compliant.

We also note that the timing of the decision is propitious given the Government’s intention, laid out in a December 24 cabinet paper, to review the climate reporting disclosure regime in the near future and the broader continuous disclosure liability settings later in the year as part of a wider workstream to improve capital markets settings.

Our thanks to Bill Caldwell for writing this Brief Counsel.